Institutional ownership and technological relatedness: A test of endogeneity

Building on the previous literature on corporate diversification, institutional ownership and firm innovation, this study proposes an endogenous relationship between institutional ownership and corporate technological relatedness. Technological relatedness is the degree to which a set of industries in which a firm operates its businesses demand similar technological knowledge. A Vector Autoregressive analysis of data from U.S. manufacturing firms shows that firms enhancing technological relatedness attract more institutional investors and as predicted, this pattern is particularly strong for pension fund ownership. In contrast, the analysis fails to show that institutional investors cause a firm's business portfolio to increase in technological relatedness.